Top EU banks facing bad debt blow

London, May 9, 2009

The first-quarter results from two more European banks showed bad debts soaring in the face of tough economies.

Top European banks continued to show the impact of the looming recession as companies and consumers are increasingly running into trouble.

Royal Bank of Scotland (RBS), now 70 per cent state-owned, fell to a slim January-March loss after bad debts quadrupled to GBP2.9 billion ($4.4 billion) and it took a GBP2.1 billion writedown on risky assets.

However, RBS warned that it expected bad debts to keep climbing throughout this year as faltering economic growth puts more companies and households under financial pressure.

'We expect credit conditions to continue to deteriorate over the next few quarters consistent with these trends and that there will be a slowdown in financial market activity compared with the very buoyant conditions seen in Q1,' our sister publication the Gulf Daily News quoted chief executive Stephen Hester as saying.

He said bad debts this year will be at least four times the first quarter level, so over GBP11.4 billion, more than 50 per cent above last year's level.

RBS made a loss of GBP44 million for the three months to March 31, compared with a GBP479 million profit a year earlier, the bank said.

'They had a strong trading quarter in the investment bank, probably stronger than people had thought. The impairments probably weren't as bad as expected either,' said Sanford Bernstein analyst Bruno Paulson.

RBS yesterday also warned that its net interest margin - the difference between the interest paid to depositors and creditors and the interest charged to borrowers, a key profit driver - fell in the first quarter and would keep falling over the rest of the year.

The margin dropped to 1.73 per cent in the first three months of this year, and looks set to fall by a further 0.15 percentage points for the year as a whole, RBS said, blaming intense competition for retail deposits.

Meanwhile Germany's Commerzbank made an 861million euro ($1.2 billion) loss in the quarter, after a 1.2 billion euro charge from the investment bank and a 54m euro charge from its commercial real estate unit.

The Frankfurt-based bank which has been hit by writedowns on debt products related to the US residential mortgage market unveiled bullish targets as part of a planned overhaul, which included a reshuffle of its board.

The lender has amassed a tally of writedowns and costs from the financial maelstrom of almost 17 billion euros since last year, making the now partly state-owned bank one of Europe's highest profile casualties.

Nonetheless, Commerzbank pledged to return to profit no later than 2011.

Chief executive Martin Blessing wants to make an operating profit of more than 4 billion euros a year from 2012, despite being lumbered with an annual bill of about 1.5 billion euros for interest on government loans taken to salvage its finances.

Blessing threw cold water on speculation that the bank might need more fresh capital.

'As it stands today we have enough capital to see us through the crisis,' he said.

'This bank is strong enough to make it without state help in the long run.'

'Commerzbank is in the eye of the financial storm,' said Konrad Becker, an analyst with Merck Finck.

'And it is conducting open heart surgery on Dresdner Bank.' Commerzbank took over Dresdner Bank earlier this year. – TradeArabia News Service